Watch out for these red flags that can trigger a tax audit

tax image

 

Little can strike more fear in the heart of taxpayers than the prospect of the Internal Revenue Service questioning their tax return.

Yet, for most people, the chances of an audit are slim. Of the nearly 148 million individual tax returns filed in 2016, just 0.7 percent (about 1 million) were audited, according to the IRS.

The factor that increases your chances the most? Making a lot of money. If you earn more than $1 million, the audit rate jumps to 5.8 percent.

“This is one case where the less money you make, the better off you are,” said Bill Smith, managing director at CBIZ MHM’s National Tax Office in Washington.

While getting contacted by the IRS regarding your return will not always result in owing more to Uncle Sam — sometimes it actually leads to a refund — it usually does mean you face additional taxes, according to IRS data. In 2016 alone, audits resulted in taxpayers forking over a collective $9.8 billion.

The IRS does not reveal exactly why it chooses to audit the returns it does, only overall data after the fact. So it’s entirely possible to be audited for reasons that have nothing to do with common areas of recent scrutiny.

And even if you’ve gotten away with exaggerating deductions or unreported income in the past, don’t assume your luck will last forever.

“Sometimes the IRS can get information that shows a pattern from a taxpayer that are red flags,” said April Walker, lead manager for tax practice and ethics at the American Institute of CPAs.

For instance, if successive years of outsized charitable contributions come from a taxpayer whose reported income suggests that rate of generosity would be unsustainable, it could trigger interest from the IRS.

Additionally, don’t assume that even if your income level makes the chance of audit low that you’re in the clear. Any large deductions and credits relative to income can cause scrutiny or require additional documentation.

And regardless of income level, there are some other things on tax returns that can grab the attention of the IRS.

 

Source by:-cnbc